A Possible Escape Route

Author: Kenneth Reid Ph.D February 25, 2016

On Sunday evening I wrote an article on general market conditions, drawing an analogy to a state of purgatory, with ‘heaven’ above and ‘hell’ below. The article referenced the financial ETF (XLF), which has been sluggish, as the banks are being held hostage by the coming wave of bankruptcies in the energy sector.

No one knows which banks are swimming naked, and we won’t find out until much later in the year.

Similarly Biotech is also lackluster due to the sudden departure of the ‘animal spirits.’ Rallies have been muted affairs and market breadth has been generally poor. Lots of traders and pundits appear to be waiting for the next shoe to fall.

Consequently, there is an excellent chance of a ‘surprise’ rally.

The key resistance level in the S&P futures is 1920 and we closed at 1930 on Wednesday. That’s a good sign. I consider 1920 a key level because it is the Volume Profile Point of Control over the last 60 trading days (since 11/27/15). It was resistance and now it’s support.

The interesting thing about the shape of the volume profile is that is has a gap from 1936-1946 and then a large low-volume zone between 1946 and 2030 (both areas are circled on the accompanying chart.) I call such low volume zones “speed zones” because markets tend to move very quickly through them… in both directions.

Therefore, if the S&P futures start to move into the gap zone (1936-46), which could happen any time, there is potential for a huge short-covering rally to ignite. We are looking at a possible 100-point move in the S&P.

That said, the market still needs to make up its mind: up or down. This is not a time to have strong opinions. Keep an open mind and you will soon see something interesting.

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KennethReid

Member Since 07.29.2013

Dr. Kenneth Reid holds a Ph.D. in clinical psychology. For almost two decades, however, he has been applying his academic training to the markets as an active trader, market pundit, model portfolio manager and trading coach. Dr. Reid has written for Forbes, SmartMoney, SFO Magazine and appeared on CNBC. A competitive tennis player, he uses principles and techniques proven in sports psychology to help traders achieve peak performance. His website is www.daytradingpsychology.com

Dr. Reid also has a keen interest in Tesla Motors and has a blog and trading service for Tesla and TSLA stock at www.teslachronicles.com